Economic Prediction 2012: 4 Downside Risks from Nouriel Roubini

People wait to enter a government job centre in Malaga, southern Spain January 27, 2012. Spain's unemployment rate rose to 22.9 percent in the fourth quarter of this year, passing the five million mark, data from the National Statistics Institute showed on Friday, up from 21.5 percent in the previous quarter. Photo: Reuters

The U.S. economy is growing at a respectable 2.8 percent annual rate, the U.S. jobs market has added 243,000 nonfarm payrolls in January and the S&P 500 Index is up eight percent year-to-date. Nouriel Roubini's economic prediction for 2012, however, is still decidedly bearish.

Roubini, chairman of Roubini Global Economics, sees four downside risks that are likely to materialize in 2012 and undermine global growth and eventually negatively affecting investor confidence and market valuations of risky assets.

The four risks are Eurozone recession, weakening economic performance in China and Asia, weakening U.S. growth momentum and geopolitical risks in the Middle East.

Eurozone Recession

In the fourth quarter of 2011, the Eurozone economy contracted 0.3 percent compared to the previous quarter.

The credit crunch in the banking system is becoming more severe as banks deleverage by selling assets and rationing credit, exacerbating the downturn. Meanwhile, not only is fiscal austerity pushing the Eurozone periphery into economic free-fall, but the loss of competitiveness there will persist as relief at the waning prospect of disorderly defaults strengthens the euro's value, said Roubini.

The Chinese properties market, on which much of the economy and lending activities hinge, saw a price decline of 0.18 percent in January from a month earlier, according to the China Real Estate Index System, reported the Wall Street Journal.

Other Asian economies - Singapore, India, South Korea and Japan - are also not performing as well as expected, said Roubini.

Weakening U.S. Growth Momentum

Recent U.S. data suggests that economic growth is accelerating, if anything. However, Roubini thinks growth momentum appears to be peaking and fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown.

Moreover, he pointed to the problems of weak global demand, subdued domestic consumption demand and continued trouble in the credit and housing market.

Geopolitical Risks in the Middle East

There are many things that could go wrong in the Middle East, any combination of which might stoke fear in markets and lead to much higher oil prices, said Roubini.

He cited Iran, Libya, Bahrain and even Saudi Arabia, Kuwait and Jordan as potential concerns.

A white Fiat van rammed into pedestrians outside enjoying a late afternoon stroll on Las Ramblas in Barcelona on Thursday killing at least 13 people and leaving hundreds injured. The Islamic State group claimed responsibility for the attack.